Icu script
- 1. ICU script
- 2. pt1 • Plan by Keynes in 1944 rejected at the Bretton woods conference (planned for the post war reconstruction of the world economy- three institutions that are with us still today). • Plan for the ICU stemmed from three core principles; • 1. in his words, ‘the equality of credits and debits, of debits and liabilities’; like a central bank working at an international scale with a completed balance sheet of trade between nations. • 2. International monetary settings tend to ‘throw the main burden of adjustment on the country which is in the debtor position’; seen today in the interactions between Germany and Greece; expected to improve their fiscal position- very difficult if trade imbalances within Europe continue to persist (as I’ll explain later if you’re not sure). • 3. Finally; ‘the problems of debtors can only arise if creditors are not choosing to make use of the purchasing power they have obtained’ i.e. if the excess savings earned by nations with a trade surplus are not used in productive ways abroad – often as a result of excessive trade imbalances.
- 3. pt2 • Worked like this; • The ICU would issue Bancors (value tied to gold) as a new foreign reserve currency used by central banks (valued against all other individual currencies at an agreed amount). • A country would withdraw Bancors from the ICU whenever it needed to pay for imports and deposit Bancors whenever it exported goods (instead of turning to international markets. • In the ICU each country would hold a national account- a kind of balance sheet with a maximum number of Bancors that can be deposited or withdrawn from its overdraft facility (measured by its average trade volume over a period of 3 years). • The overdraft facility can also be used to finance expansionary policies in times of a shortcoming of domestic demand or cyclical crises.
- 4. pt3 • Incentives to keep a trade balance close to 0 Bancors • When country is in debit or credit to the union (i.e. a negative/positive number of Bancors in its account) in excess of a quarter of it’s average trade volume (it’s quota), it will pay a rate of 1% on it. • If a country exceeds half its quota (whether or not this is as a result of a trade surplus or deficit), it will pay a rate of 2%, and the governing body will force a country to take necessary action to adjust its trade balance • For surplus nations; 10% charge on their overdraft facility, currency appreciation, controls on capital inflows whilst abolishing controls on outflows (make sure global demand isn’t suppressed), lowering tariffs, measures to expand domestic credit and demand, international loans for the development of poorer nations. If by the end of a year their deposits still exceed half of its average trade volume, in effect the value of their trade surplus will be confiscated entirely. • For deficit nations; the inverse; currency appreciation, controls on capital outflows, higher tariffs, lower wages; big one; productive investment, financed by the ICU’s revenues earned from surplus nations. • • Therefore, the ICU would act as what some including Yanis Varoufakis call a Global Surplus Recycling Mechanism (or GSRM)
- 5. pt4 • World economy-tough problems, the root causes can be traced back to huge trade imbalances. Many surplus nations pursued domestic policies that deliberately create huge amounts of excess savings especially in East Asian countries; creating an undervalued currency, freezing wages and lowering interest rates which charges more to households but less to exporters and firms – representing a shift of resources away from domestic consumption, into the tradable goods sector who amass savings which they cannot use to invest in the domestic market because falling household consumption means there is a lack of effective demand which justifies this, so the excess savings held are invested abroad instead. • Once these excess savings were great enough (caused by an excessively high trade surplus) the big deficit nations (U.S) began to develop real estate bubbles and consumer credit binges since opportunities for productive investments abroad run dry, and the huge capital exports from surplus nations instead go into unproductive investments and credit bubbles. Once a run on the banks began, there was unemployment everywhere, even in surplus nations where firms fired workers because the supply of their goods and services exceeded demand. Hardest hit were deficit nations, especially those on Europe’s periphery where the lack of a fiscal union compounded the problems in countries where stimulus was necessary. • Today, the US can no longer absorb the world’s surpluses and the effect of its long held trade policies on private consumption has meant it cannot continue to invest in order to stimulate demand without inflating the real estate bubble or stock market (until recently).
- 6. pt5 • Illustrates the relationship often misunderstood in the Europe. Here we see Keynes’s original concerns about the burden put on debtor countries. • • Under the proposed ICU, the governing body would be largely independent, with no one country having control over the other. The U.S wanted to replace Britain as the new world power; wanted to regulate post-war reconstruction themselves, recycling their surpluses where they saw fit (Germany, japan) to create markets for U.S exports; make sure the rest of the world was dependent on them. • So, they saw this as unfair- didn’t want to curtail their political strength and power by restraining their surpluses. • Africa; especially hurt by East and Southeast Asian trade policy; they cannot diversify from raw materials into manufacturing e.g. cotton into textiles arguably because of the competitiveness of Asian goods. Leaves them at the mercy of international markets and commodity prices (which has hurt them very recently). • (read slide) Together with a global tax on personal wealth (Thomas Piketty), this could make a formidable attempt to stop the boom and bust cycle. Inequality tends to increase excess savings, and as discussed earlier, this can lead to crises like 2008. Also, it is the most efficient way of solving the EU debt crisis – onetime tax on wealth across EU would rake in enough to reduce total debt by 20% of GDP, and with the ICU’s surplus recycling mechanism; this crisis would likely be prevented from happening again in the future.